BEGINNERS GUIDE TO INVESTING IN CAPITAL MARKETS

1.0 The process

Do you feel the urge to participate in the capital market but you dont know how? Below is a simple guide.
1.1 Step One: Conduct Financial self examination
Analyze your nancial objectives, your incomes sources, constraints and risk tolerance. Ask whether you are
nancially ready to invest in the capital market? For beginners it is not advisable to borrow to invest in the
capital markets. In a volatile market, you could lose the borrowed money and still have to pay for it.
1.2 Step Two: Deal only with licensed Entities
Identify your nancial investment advisor and open an account with them. your investment advisor, be
they an investment bank a stock broker or any other rm advising you on investment must be a licensee of the Capital Markets Authority (CMA). For a quick check, log on to www.cma.or.ke or call 221910
1.3 Step Three: Open a Central Depository System (CDS) account
A Central Depository System (CDS) a computer system operated by Central Depository and Settlement Corporation (CDSC), which facilitates holding of securities in electronic accounts opened by shareholders. It manages clearing and settlement of all nancial instruments
traded through the Nairobi Stock Exchange (shares and bonds) in a safer, faster and easier manner.
You open a CDS account by completing and signing a securities account opening/maintenance form with your Central Depository Agent
(CDA), providing two recent passport size photographs and a photocopy of your national identity card. A CDA is a central depository
agent, either a Stockbroker an Investment Bank or a Custodian Bank, who has been authorized by Central Depository and Settlement
Corporation (CDSC) to open CDS accounts on behalf of investors.
1.4 Step Four: Take Control of your Trading Account
Ensure you take full responsibility of your trading account at your Investment Bank or Stockbroker. These accounts are for your exclusive
use. Never let anyone, including your dealers representative use your account for their own trading. It is this account you will be referring
to, to nd out what transaction have been made by the Investment Bank or Stockbroker on your behalf. It is important to make sure that
you are receiving all documents relevant to your transactions including; receipts, transaction statement, purchase and sales contracts,
CDS account statements, dividends etc.
2.0 TIPS TO INVESTING WISELY IN THE CAPITAL MARKETS
These are some of the basic things one may need to know as they make entry in eld of investing in the capital markets.
2.1 Know What Investment Products Are Available
The Kenyan capital market oers the following investment products:
Stocks & shares (equities)
Bonds
Collective investment schemes (unit trust and mutual funds)
2.2 Know Your Investor Prole
A wise investor chooses one or more of the above investment assets not only according to his goals and the
amount of capital available, but also according to his own tolerance for risk. All investments carry risk; some
very much more than others. You have to nd out whether you arerisk-takingorrisk aversetype of
a person, so that you can pursue an aggressive, moderate or conservative investment programme. In
other words, an investment strategy that ts your risk prole, as you have to be comfortable with your
choices. If, for instance, your risk preference is low, then your portfolio should be low on equity (with its propensity for price oscillations).
2.3 Choose the Right Investment Product
Bonds are capital instruments that attract institutional investors and require a minimum of Kshs. 50,000 in capital to trade in. You, as a
retail investor, might be more comfortable trading in equities and unit trusts. But which one should you choose?
If you are, or you have engaged a professional who spends time researching on stocks and market trends and enjoys the prospects of
high returns and the associated high risks, then direct stock investing is probably for you. If, on the other hand, you want to be relieved of
the day-to-day worry of personally handling a host of direct investments, have small sums to invest each time and seek diversication as
soon as possible, you will want to consider investing in collective investment schemes.
The kind of engagement one seeks within the capital markets will be determined by their investment objective among the following;
Maintain liquidity with some protability
Capital gains (go for companies that give bonuses and those with potential to rise in prices)
1.

Maintain a stream of incomes - Dividends (go for dividend paying companies or for bonds)
Long term savings (go for solid companies/Long term bonds)
Take over a company (one will be required to declare interest after owning a certain percentage of the company)
Prestige of owning a company

2.4 Do Your Homework before You Invest

Dont put your money in until you have understood all relevant information regarding the investment.
For shares and bonds, it means selecting your securities based on good old fundamentals, rather than
on hot tips. Prepare yourself to do (or have your broker or investment bank do) the vigorous homework of analyzing company annual reports, accounts and other statements while keeping abreast of
whats happening in the industry, country and elsewhere in the investment world. You might want
to consider combining this fundamental analysis approach with intelligently trying to time your
entry into the market. Be skeptical of anything recommended by friends or picked up from
rumours, particularly if you cannot explain their choice by rational reason. The rule with buying stocks is caveat emptor: let the buyer beware.
For collective investment schemes it means scrutinizing closely the collective investment
schemes fund as well as the management company before you invest. Read and understand
the funds prospectus, the trust deed, nancial reports, its investment objective, where
and how your money will be invested, associated risks and fees. Do your research, gleaning clues of the companys funds
performances over time compared with peer funds - it is the fund that outperforms its competitors (but it may do it by adopting higher
risks) when the market is not doing so well that deserves your consideration. But also note that a funds track record is no guarantee of its
future performance.
For bonds, one needs to be able to monitor the direction of interest rates. While one can not lose the principal amount put in these
securities, the value may be eroded by ination while the competitiveness of these securities may be watered down by rise in interest
rates within the economy.
2.5 Build Your Buer First
Do not embark on any investment programme if you have not built up a liquidity or cash buer of between 6 and 9 monthsexpenses to
take care of nancial emergencies. The buer is vital as otherwise a nancial mishap can cause you to plunder your investment programme too early for it to gain momentum. Also settle short-term, consumer-driven debts rst before using savings to invest. Understand the greater risk of investing with borrowed money.
2.6 Think Long Term
Short-term thinking can short-circuit long-term eectiveness. Bear in mind that in any investment, there will always be short-term
aberrations that will even out in the long-term, so have the sustaining power to hold your investments for longer periods. History has
shown that investment markets always recover and move on to new heights. But if you decide to turn speculator and go for quick-grabs,
do so with your eyes wide open and never with more money than you can aord to lose. The rule is neither to invest and hold long positions nor to speculate with short positions, but rather to invest and do your homework. Hold long positions but be keen to take gains
when opportunities present themselves.
2.7 Avoid Putting All Your Eggs in One Basket
The best way to minimize total risk while keeping return rates high is to diversify your investments across various investment products
and within asset classes. If equities are your sole investments, it makes sense to diversify across dierent companies and sectors; if it is
unit trusts, invest in several types of funds instead of just one. The loss made by some counters/funds can be absorbed by the gains made
in other counters/funds. There is no excessive exposure to the vagaries of a single investment. As they say, theres safety in numbers.
However, avoid over-diversication. Too much diversication sees your portfolios performance
regressing to the mean of your benchmark index.
2.8 Stay On Course
Review and monitor your investments regularly to ensure that your investment programme is still
relevant to your nancial goals; monitor prices, attend Annual General Meeting, read research publications etc. Track the performance of your investments to determine whether your expectations
of returns have been met, or if there is a need to restructure your investments if your asset mix gets
out of balance. Dont be afraid to swap one investment for another if the former is overvalued and
the latter undervalued. But switch to preserve your capital during times of market uncertainty, not
to chase after elusive, higher returns.
2.9 Be Aware Of Scams
The information provided here is only a guide. If in doubt please conduct Capital Markets Authority,
on 221910 or the Nairobi Stock Exchange (NSE) at 230692
2.

GLOSSARY OF SOME COMMONLY USED TERMS

Active Securities
These are securities, which are most frequently traded at the Exchange.
Acquisition
Refers to all business and corporate organization (ownership and management)
brought under the control of a new management.
Articles of Association
A document describing the purpose, place of business, and details of a company.
Agent
An agent is normally a representative of a stockbroker and does business of
buying and selling securities for a return commission through the principal, the
stockbroker.
All Or None (AON)
This is a restriction placed on an order to execute the entire size of the order at a
time without splitting it into several lots.
Allotment Letter
A document(s) issued by a company to investors showing the number of shares
(securities) allotted to the applicant subscribing for such securities. It also indicates the number and the value of shares.
Annual Report
It is a document issued annually by a company to its shareholders containing
the Chairmans statement, and the nancial performance including the assets
and liabilities, prot and loss and other relevant information on the company.
Publication of an annual report is mandatory for all public companies.
Annual General Meeting (AGM)
It is a mandatory meeting by law held annually by all public companies and to
which all shareholders are invited to attend to discuss the aairs and performance
of their companies.
Amalgamation
Two rms, previously independent, coalesce to form one new business.
Asset (S)
The term Assets refers to all the properties and stock of investments including
cash and bank deposits, which a company owns.
Asset-Backed Debt Securities (Abs)
These are private debt securities that are issued pursuant to securitization.
At Best Order
This is an instruction from a client to a broker authorizing the broker to use his
discretion and try to execute an order at the best possible price.
Authorized Securities Dealer
A bank licensed under the Banking Act or a nancial institution approved by the
Authority to deal in xed-income securities listed on the Fixed Income Securities
Market Segment at a stock exchange. They are required to act as market makers
and dealers in this market segment; facilitate deepening of the xed income securities market; enhance trading and liquidity in the xed income securities market;
and minimize counter party risk.
Authorised Share Capital
This is the companys share capital, which is stated in the memorandum and
Articles of Association as required by law. Authorized share capital is given by
nominal (par) share value times total number of shares authorized. To increase
the authorized share capital, a resolution must be passed to that eect by the majority of the shareholders and an application made to the registrar of companies
for authority to increase the shares.
Bad Delivery
The delivery of securities relating to a trade (either client to broker or from broker
to broker) is considered bad when there are some defects in the share certicate
or the transfer deed, or when it is not delivered within the stipulated period.

3.

Bare Trustee
One who has no benecial interest in the subject matter of the trust
Bear
A market speculator who believes that the market prices will fall hence does sell
their securities in anticipation of buying them back at lower prices in the future.
Bid
A buy side of the quoted share, which is the highest price a buyer, is willing to pay
to purchase a security.
Bonus
These are additional shares given to existing shareholders at a specied ratio and
paid for from the companys normal revenue reserves. Bonus shares are mostly
issued in lieu of paying cash dividends although a company can issue both.
Bonds
These are long term xed interest securities issued by government and corporate
bodies. In eect, they are promissory notes in which the issuer makes an obligation to pay interest at specied times and intervals and to pay back the principal
at maturity of the Bond. The holders of bonds get interest even if the issuer does
not make a prot. (Also see Treasury bonds)
Bull
A market speculator who believes that the market prices will rise hence buys
securities in anticipation to sell at a prot in the future.
Capital Gain
Capital gain is an amount released at the disposal of securities, which is in excess
of original cost.
Capital Loss
Capital loss is a loss raised at the disposal of securities at a sale price below the
initial purchase price.
Capital Markets
Refer to the aspect of nancial markets, which provides long-term capital for
investments. Capital markets foster the mobilization of savings into productive
investments by providing an outlet for accumulated capital (savings) and allocating the capital to investments that bring the greatest value to the economy.
Capital Reserves
It is part of the companys earnings that is normally not distributed as cash
dividends and is made up of revaluation of assets and share premium. It may be
distributed as bonus shares to shareholders.
Central Depository And Settlement Corporation (CDSC)
A Company approved by the Authority under section 5 of The Central Depositories
Act to establish and operate a central depository system for the central handling
of securities.
Closing Date Of Oer
The last day on which an oer made for subscriptions in the primary market or
sale in the secondary market may be accepted.
Closing Price
The last price of the day at which a particular security was traded.
Convertible Bond
A bond, which may be converted under specied conditions into a specied
number of ordinary shares of the issuer.
Capital Structure
It is the various components of a companys long-term capital e.g. debentures,
ordinary shares, preference shares etc.
Collective Investment Schemes (CIS)
Collective investment schemes are pools of funds that are managed on behalf
of investors by a professional money manager who buy shares, bonds, or other
securities according to specic investment objectives established for the scheme.

CISs take the following forms:

a) A mutual fund: A public or external company incorporated solely to
hold and manage securities or other nancial assets. The company accepts
funds from investors and uses those funds to buy a portfolio of securities
and other nancial assets and employs a professional fund manager to
manage the investment. The company issues shares, which represent prorata share of the pool of fund assets to investors. A mutual fund is either
open ended or closed ended.
i). Open -end funds -funds, which stand ready to repurchase their
shares from the holders in any quantity and whenever the holder
should desire. They also sell shares in any quantity to prospective
investors at whatever time the investors determine
ii). Closed- end funds - funds which issue a xed number of shares and
do not stand ready to repurchase their shares from their shareholders
when they decide to sell them. The Law requires that closed ended
funds be listed on an exchange in order to provide liquidity to the
shareholders. These shares are traded at prices determined by the
forces of supply and demand.
b) Unit Trust (s): These are collective investment vehicles that pool funds
together from small investors by issuing units (specied absolute minimum lots of shares of the trust).
A unit trust is constituted by a document known as the trust deed and a
professional manager manages the funds.
Corporate Governance
Corporate Governance refers to the manner in which the power of a corporation is
exercised in the running of the corporations total portfolio of assets and resources
with the objective of maintaining and increasing shareholder value with the
satisfaction of other stakeholders in the context of its corporate mission.
Credit Rating Agency
A professional whose role is to give an objective and independent opinion on the
general creditworthiness of an issuer of a debt instrument, and its ability to meet
its obligations in a timely manner over the life of the nancial instrument based
on relevant risk factors including the ability of the issuer to generate cash in the
future.
Cum-All
This terms means with dividend, with bonus or with rights. The buyer of the
security is entitled to a dividend, bonus declared or rightly to subscribe for further
shares.
Cum-Dividend
This term means with dividend. The buyer of such security is entitled not only to
the share but also to a dividend that has been declared but has not been paid yet.
Custodian
A company approved by the Authority to hold in custody funds, securities,
nancial instruments or documents of title to assets registered in the name of a
collective investment scheme, local investors, East African investors, or foreign
investors. Every investment adviser and fund manager that manages discretionary
funds shall appoint a custodian for the assets of the fund.
Debenture Stocks
A debenture is an acknowledgement of debt by a company. Debentures may be
secured against certain specic properties of the company. However, debentures
may also be unsecured or may be convertible to equity at a future date, to be
exchanged for the companys ordinary shares at the holders option depending on
the agreement. Interest on debentures is payable on specied dates whether or
not there are sucient prots.
Dematerialized Securities
A book-entry security that has been prescribed by the central depository whereby
the physical certicate is no longer recognized
Derivative Instruments
Financial assets whose value is dependent on the value of an underlying asset
such as ordinary shares, bonds, currencies or commodities. They include forwards,
futures, options and swaps. They are used for risk management or hedging in

anticipation of future markets directions.

Diluted Earnings Per Share
This is the monetary value of prot after tax on each of the outstanding and
potential ordinary shares. Dividing net income by the number of outstanding and
all potential ordinary shares. It is a long run prudent measure of a companys
protability.
Dilution
It refers to an increase in the number of shares of a companys stock, causing the
value of each share to decrease.
The number of shares increases when the company oers new stock to the public
to raise cash; or when employees exercise their stock options; or when holders of
convertible bonds convert their bonds to stock; or after the issue of a bonus. Companies that can aord to will frequently buy back issues of stock to ght dilution.
A Collective Investments Scheme may suer reduction in the value of its portfolio
due to factors like dealing costs
Dividends
It is part of a companys prots, which is distributed to shareholders as cash after
it has been declared and approved in an annual general meeting (AGM). The
amount of prots not distributed is retained as reserves of the company.
Dividend Per Share
It is the total dividends paid divide by the total number of issued and fully paid
shares. It is therefore the amount of dividends paid for each share.
Dividend Yield
It is the return (yield) on every shilling invested in securities normally expressed
as a percentage. It is the dividend per share expressed as a percentage of the
market price per share.
Dividend Cover
The number of times the companys prots cover the dividends payment and is
calculated as prots after tax dividend by the dividends declared.
The Dividend Cover can also be arrived at buy dividing the Earnings Per Share by
the Dividend Per Share.
Earnings Per Share (EPS)
This is the monetary value of prot after tax on each ordinary share derived by dividing net income by the number of ordinary shares outstanding. It is a measure
of a companys protability.
Eligible Securities
A security, which has been prescribed by a security exchange to be immobilized
with a central depository
Equity Financing
Equity nance refers to risk capital or funds raised from the capital markets by
issuing securities such as shares. It is the nancing of the companies activities
using shareholders funds.
ESOP (Unit Trust)
Employee share ownership plans or Employee Stock Option Plan. It is a Collective
Investment Scheme (CIS) in the form of a unit trust. Stock options are the instruments that are oered to employees, allowing them to buy a certain number of
shares in the company at a specic price. This price could either be lower than
the current market-price of scrip-in which case their gains are immediate-or the
same, whereupon future jumps in the share-price will show up as prots for them.
Ex-Dividend
This is the opposite of cum-dividend. The purchaser of a security, which has been
declared as ex-div, will not be entitled to dividends when it is paid. The security
exchange marks this XD beside the security on the daily ocial trading list.
Normally, the price is adjusted to reect the dividend payment.
Ex-All
This terms means without dividend, with out bonus or without rights. The
buyer of a security, which has been declared as ex-all, will not be entitled to dividends when it is paid, bonus shares and rights issues when declared and issued.

4.

Financial Instrument
Any contract that gives rise to both a nancial asset of one enterprise and a
nancial liability or equity instrument of another enterprise.
Financial Markets
Refers to money markets and capital markets, which constitute the nancial system. The money market refers to the short-term aspect of the nancial markets,
whereas the capital markets refers to the long-term aspects, the cut-o point
being the duration of one year.
Financial Plan
An ongoing process where an investor relates his nancial position to his Investment objectives within a constantly changing nancial environment
Futures Contract
An obligation to buy or sell a commodity or a nancial instrument on a date in the
future at a xed price.
Guaranteed Bond
A bond guaranteed as to the interest and principal by a third party, usually a
larger, better known, or more credit worthy than the issuer of the bond.
Hedge
A strategy to eliminate or reduce risks in an investment entered into.
Immobilization Of Securities
Securities where the underlying physical certicates have been deposited with
and are held by a central depository
Indenture
A contract underlying a bond issue. The issuer of the bond and the trustee acting
for the bondholders or the bondholders themselves sign the contract and it sets
the rights and responsibilities of the issuer, trustee and bondholders, and the
terms of the security issue.
Index
Statistical composition that measures changes in the economy or the nancial
markets, normally stated as a percentage from a base year. An index measures the
up and down of the prices of such items as consumer goods and services market,
shares and bonds market, and commodities market.
Initial Public Oering (IPO)
An IPO is an oer made to the public to subscribe for securities by an issuer for the
rst time. An IPO is also termed asgoing public.
Investor
A person or an institution that uses his savings or borrowings to buy securities.
Investor Compensation Fund
A fund to compensate investors who suer loss resulting from the failure of a
licensed broker or dealer to meet its contractual obligations.
Investment
An Investment is a commitment of funds to one or more assets that will be held
over some future time period, in the hope that it will generate more income. The
assets could be tangible like real estate properties or intangible monetary assets
like securities. Investments are based on nancial goals and objectives.
Investment Adviser
Licensed person(s), who engage in the business of advising their clients as to the
value of securities and whether it is advisable to invest, purchase or sell securities.
Investment advisers also carry out analysis or reports concerning securities and
can manage portfolios of investment under a contract or an agreement with
investors.
Investment Bank (s)
Non-deposit taking institutions that advise on oers of securities to the public or
a section of the public, corporate nancial restructuring, takeovers, mergers, privatization of companies, underwriting of securities, etc. They can also engage in
the business of a stockbroker, a dealer, and fund manager of collective investment
schemes and provider of contractual portfolio management services.

5.

Issuer
The term Issuer refers to any company or other legal entities whose securities
are the subject of an application for listing in Kenya or have been listed.
Issued Share Capital
This is the amount of capital, which has been subscribed to and fully paid out of
the authorized share capital of a company.
Last Day To Register Or Books Closing Date
The day by which securities must be lodged with the companys oce to qualify
for dividends, rights or bonus shares.
Limit Order
An order placed by a customer with a broker stipulating a limit as to the price at
which shares are to be bought or sold.
Market Capitalization
This is the estimated worth of the company derived by multiplying the current
market price by the number of shares issued and outstanding at a specied
period.
Market Price
The market price refers to the ruling price of shares on the trading oor of the
exchange at any given time.
Maturity Date
The date specied in a commercial paper, note, bond, or other evidence of debt on
which the debt is due and payable. Maturity depends on the terms of the debt.
Merger
The combining of two or more rms into one rm where the shareholders of the
combining rms retain their powers, rights and benets in the new rm. It is also
called uniting of interests. There is potentially no acquirer nor acquiree and the
combining entities are almost of equal size.
Odd Lots
This is a lot which is less than the stipulated Board Lot. For example a Board Lot
at the Nairobi Stock Exchange comprises a trade of more than 200 shares or more
than Kshs 3,000 in value, and anything less than this is an Odd Lot.
Oer
This is the opposite of a bid. It is the lowest price at which a stockbroker or dealer
is willing to sell a security on behalf of a client or as a principal respectively.
Sometimes referred to as the Ask.
Open Outcry
Open outcry system refers to a system of trading at the stock exchange oor
whereby brokers shout their bids and oers of securities on behalf of their clients.
Option
This is a contract between a dealer and a buyer, which gives the latter the right
to buy, call option, or sell, put option, a given number of shares at a xed price
within a given period.
a.Call Option
An option that that gives the owner a right to buy a security at a set price
(strike price) for a predetermined period of time.
b.Put Option
This is an option allowing the holder the right to sell a security at a specic
price within a specic time period.
Over-TheCounter Trading (OTC)
Refers to issues traded primarily in a dealers market through a network of
telephone and telecommunications system. It is sometimes referred as o-board
trading.
Paid Up Capital
Paid up Capital refers to the amount of money paid by shareholders of the company and is a total of all shares issued multiplied by the par value for each share.
Par Value
The face value or principal or maturity value of a security appearing on the face

of the security instrument. For a traded security, the par value is for bookkeeping
purposes only.
Portfolio
The entire set of security holdings of an individual or institution, or a group of
securities in which members of the public are invited to acquire shares pursuant to
a Collective Investment Scheme (CIS). A portfolio may include preference shares,
ordinary shares and bonds of various companies.
Potential Ordinary Share
A nancial instrument or other contract that give the holder the right to purchase
ordinary shares. Warrants and options are examples of nancial instruments that
give the holders the right to purchase ordinary shares.
Privatization
This is the act of transferring government owned assets (i.e. state owned
enterprises) into private hands or general public, either through public oering,
tender or private contract. The act is also referred to as divestiture since it entails
divestment by the government.
Proxy
An authorization by a shareholder of a company transferring his/her right to vote
to another person through written instructions.
Prospectus
A document, notice, circular, advertisement or any other invitation oering to the
public for subscription (or purchase) any shares or securities of a company or a
mutual fund.
It must explain the oer, including the terms, issuer, objectives (if mutual fund)
or planned use of the money (if securities), historical nancial statements, and
other information that could help an individual decide whether the investment is
appropriate for him/her. It is also called oering circular or circular.
Public Oer
A public oer is an oer made by a company to the public to subscribe to new or
existing shares being oered for sale to the public as in the privatization exercise.
Par Vlaue (Nominal)
It is the value given to shares when they are created and has very little relevance
to the real value (market price). Dividends are expressed as a percentage of this
value.
Price Earning Ratio (P/E)
The P/E ratio refers to the number of times it takes a shareholder to recoup his
investment in a share. It is given by the market price of a share over its earnings
per share. It is the pay back period of a share.
Primary Market
Refers to the initial oering of a security as well as the activities of investors
subscribing to securities being oered by the issuer.
Private Placement
The sale of securities directly to institutional investors, such as banks, mutual
funds, insurance companies, pension funds, and foundations. Does not require
CMA registration, provided the securities are bought for investment purposes
rather than resale, as specied in the investment letter.
Prompt Lots
These are transactions in securities, which must be delivered by 3 oclock of the
same trading day.
Public Company
A public company is a limited liability company, which is not a private company.
A public company, which is listed, may not have any restriction on the transfer of
shares.
Quotation
This is the price at which a security is currently traded on the stock exchange.
The quoted prices of security vary from time to time depending on demand and
supply of the security.

Registration
Registration refers to the act of entering into a companys register the names and
addresses of all shareholders. Thereafter, a shareholder receives a share certicate
made out in his name and receives reports, circulars and dividends issued by the
company.
Rights Issue
This is an oer to the existing shareholders to subscribe for a new issue, usually at
a preferential price, in proportion to their existing shareholdings.
Revenue Reserves
This is part of the companys retained earnings that is distributed to shareholders
as bonus or dividends in the future or may be used for company expansion.
Retained Earnings
Amounts that a company has re-invested in the business over the years and is
usually a cumulative gure. Retained earnings are increased by net income and
decreased by loses and the declaration of bonus.
Scrip
The term Scrip refers to share certicates.
Scrip or Stock Dividend
This refers to a share that is issued to existing shareholders in lieu of dividend.
Secondary Market
The market in which securities are traded after their primary oering. An organized stock exchange and over the counter market are examples of secondary
markets.
Securities
Financial instruments or legal documents signifying either an ownership position
in a company (i.e. shares) or a creditor relationship with a company or Government (i.e. stocks and bonds).
Securitization
An arrangement which involves the transfer of assets or risks to a third party
where such transfer is funded by the issuance of debt securities to investors. Payments to investors in respect of the debt securities are primarily derived, directly
or indirectly, from the cash ows of the assets or revenue streams generated by
the entity regularly.
Settlement Period
The time prescribed with reference to the date of trade (T) within which brokers
are required to deliver the security and pay for the trade through the Nairobi Stock
Exchange.
Shares
Shares represent part ownership of the company and are classied into the following categories:
Ordinary shares shares that give the shareholder part ownership of the
company in proportion to the number of shares held and entitle him to
dividends. It is the risk capital that is entitled to residual claim assets in
the event if liquidation.
Preference shares - shares bearing a xed annual rate of dividend with a
prior right over all ordinary shares in the distribution of dividends from
annual prots and have a prior claim to repayment of capital on winding
up of the company.
Redeemable preference shares preference shares that can be redeemed
by the company either at xed dates and prices, or on certain specied
terms at the discretion of the board.
Convertible preference shares preference shares, which may be
converted under specied conditions into a specied number of ordinary
shares of the issuer.
Share Certicate
This is a document, which shows ownership of shares. It can be used as collateral
in acquiring a loan.

6.

Short Sale
This is the sale of securities, which are not owned. The short seller borrows the
securities with the intent to return them at a later date when he hopes to buy
them back at a lower price hence making a prot.
Special Purpose Vehicle
Any entity, which issues asset-backed debt securities and must satisfy certain
criteria stipulated under the guidelines for issue of asset-backed debt securities.
Spread
The dierence between the bid and the oer prices of a security.
Sponsoring Broker
This refers to a stockbroker who is appointed by an issuer seeking listing to liaise
between the company, CMA and the stock exchange in the process of ensuring
that the issue is successful.
Stock Market Index
The Index is a measure of stock market trends and performance. The index may be
used as an indicator of the movement (up and down) of the stock market prices.
An upward movement in the index shows that on the average, the shares are appreciating. The index is therefore a weighted average of the market performance
(see also Index).
Stockbroker
A market professional who buys and sells securities on behalf of clients at a Stock
Exchange in return for a brokerage commission.
Stock Dealer
A person who carries on the business of buying, selling, dealing, trading, underwriting or retailing securities as a principal (i.e. on his own account).
Stock Exchange
An organized and licensed market for the buying and selling of listed securities
(shares, stocks and bonds). On this market, individuals and companies can buy
shares of companies through Licensed Stockbrokers and dealers hence become
part-owners lenders to or creditors of the listed companies or the Government.
Currently, the Nairobi Stock Exchange (NSE) is the only licensed exchange in
Kenya.
Stop Order
An order with an instruction to either buy or sell once a specied price has been
reached. A buy stop order is entered above the current market price whereas a sell
stop order is entered below the current market price.
Stop Limit Order
An order to buy or sell only at a designated price once the market reaches a specic level. The stop and limit price can be the same or can be dierent. For a sell
stop limit order, the price is placed below the prevailing market level whereas for
a buy stop limit order, the price is placed above the prevailing market level.
Trade Volume
The total number of shares traded in a single security during a given period. Also
refers to the total number of shares traded on an exchange during a given time
period.

Trading Floor
The arena or area of a stock exchange where trading takes place.
Treasury Bill
A non-interest bearing obligation with a maturity of one year or less, fully
guaranteed by the Kenyan Government, payable to the bearer. Treasury bills oer
the government short-term nancing and are sold on a discount basis so that the
yield is the dierence between the purchase price and the face value there of.
Treasury Bond
This is a xed interest security issued by Government as source of long-term funds
and are issued with a maturity of more than one year.
Trust
A legal arrangement in which an individual(the trustor) gives duciary control of
property to a person or institution (the trustee) for the benet of beneciaries
Trustee
An individual or organization, which holds or manages and invests assets for the
benet of another. The trustee is legally obliged to make all trust-related decisions
with the trustees interests in mind, and may be liable for damages in the event of
not doing so. Trustees may be entitled to a payment for their services, if specied
in the trust deed. In the specic case of the bond market, a trustee administers
a bond issue for a borrower, and ensures that the issuer meets all the terms and
conditions associated with the borrowing In relation to a unit trust means a
trustee in which are invested the money, investments or other CIS portfolio that
are subjected to trusts governing the unit trust
Trust Deed
The trust deed that sets out the trusts governing the unit trust or mutual fund
every instrument that varies those trusts and their operations
Underwriters
These are specialized advisers who undertake the risk of the success or the failure
of a public oatation. There are basically three types of underwriting agreements:
a) Firm contracts the underwriting rm purchases the issue as a block
for a commission and agrees to pay the issuer the full value of the security on
or before the closing date of the issue, whether it is fully subscribed or not.
b) Stand by contract the underwriter is obliged to mop all issues, which
the issuer could not sell through some, other distributive channels.
c) Best eort contract the underwriter agrees to sell as much of thesecurities as he can at an established price but with no responsibility for unsold
proportion.
Venture Capital Fund
A company incorporated for purposes of providing risk capital to small and
medium sized business which are new and have a high growth potential, whereby
not less than 80% of the funds so invested consist of equity or quasi equity investment in eligible enterprises.
Warrant
A Corporation instrument which oers the holder the right, not an obligation,
to subscribe for new ordinary shares at a predetermined exercise price within
a stipulated exercise period. Warrants become worthless after the expiry of the
exercise period.

Disclaimer
The information provided in this guide does not constitute investment, tax , legal, or any other advice.
No representations are made as to the reliability or completeness of such information
This quide is a production of the Capital Market Authority. It is a component of a Capital Markets project by the UNDP. The Projects long-term objective is to deepen the capital markets in Kenya.

CMA 2006.

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